KEY TRONIC CORP 10-Q

Item 1: Financial Statements KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands) December 28, 2024 June 29, 2024 ASSETS Current assets: Cash and cash equivalents $ 4,244 $ 4,752 Trade receivables, net of credit losses of $ 2,931 and $ 2,918 113,132 132,559 Contract assets 18,892 21,250 Inventories 100,709 105,099 Other, net of credit losses of $ 1,496 and $ 1,679 24,159 24,739 Total current assets 261,136 288,399 Property, plant and equipment, net 27,123 28,806 Operating lease right-of-use assets, net 13,829 15,416 Other assets: Deferred income tax asset 19,287 17,376 Other 6,454 5,346 Total other assets 25,741 22,722 Total assets $ 327,829 $ 355,343 LIABILITIES AND SHAREHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 63,585 $ 79,394 Accrued compensation and vacation 6,218 6,510 Current portion of long-term debt 5,063 3,123 Other 18,904 15,149 Total current liabilities 93,770 104,176 Long-term liabilities: Long-term debt, net 106,020 116,383 Operating lease liabilities 8,429 10,312 Deferred income tax liability 9 263 Other long-term obligations 114 219 Total long-term liabilities 114,572 127,177 Total liabilities 208,342 231,353 Commitments and contingencies (Note 8) Shareholders’ equity: Common stock, no par value—shares authorized 25,000 ; issued and outstanding 10,762 and 10,762 shares, respectively 47,367 47,284 Retained earnings 73,131 76,921 Accumulated other comprehensive (loss) ( 1,011 ) ( 215 ) Total shareholders’ equity 119,487 123,990 Total liabilities and shareholders’ equity $ 327,829 $ 355,343 See accompanying notes to consolidated financial statements. 4 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except per share amounts) Three Months Ended Six Months Ended December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023 Net sales $ 113,853 $ 147,847 $ 245,411 $ 297,959 Cost of sales 106,147 136,084 224,402 275,334 Gross profit 7,706 11,763 21,009 22,625 Research, development and engineering expenses 2,320 1,758 4,609 3,999 Selling, general and administrative expenses 6,507 6,057 13,077 11,841 Gain on insurance proceeds, net of losses — — — ( 431 ) Total operating expenses 8,827 7,815 17,686 15,409 Operating income (loss) ( 1,121 ) 3,948 3,323 7,216 Interest expense, net 3,904 2,961 7,167 5,972 Income (loss) before income taxes ( 5,025 ) 987 ( 3,844 ) 1,244 Income tax provision (benefit) ( 111 ) ( 97 ) ( 54 ) ( 175 ) Net income (loss) $ ( 4,914 ) $ 1,084 $ ( 3,790 ) $ 1,419 Net income (loss) per share — Basic $ ( 0.46 ) $ 0.10 $ ( 0.35 ) $ 0.13 Weighted average shares outstanding —Basic 10,762 10,762 10,762 10,762 Net income (loss) per share — Diluted $ ( 0.46 ) $ 0.10 $ ( 0.35 ) $ 0.13 Weighted average shares outstanding — Diluted 10,762 10,889 10,762 10,889 See accompanying notes to consolidated financial statements. 5 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited, in thousands) Three Months Ended Six Months Ended December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023 Comprehensive income (loss): Net income (loss) $ ( 4,914 ) $ 1,084 $ ( 3,790 ) $ 1,419 Other comprehensive income (loss): Unrealized gain (loss) on hedging instruments, net of tax 42 230 ( 796 ) 288 Comprehensive income (loss) $ ( 4,872 ) $ 1,314 $ ( 4,586 ) $ 1,707 Other comprehensive income (loss) for the three months ended December 28, 2024 and December 30, 2023, is reflected net of tax expense (benefit) of approximately $ 0.0 million and $ 0.1 million, respectively. Other comprehensive (loss) for the six months ended December 28, 2024 and December 30, 2023, is reflected net of tax expense (benefit) of approximately $( 0.2 ) million and $ 0.1 million, respectively. See accompanying notes to consolidated financial statements. 6 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited, in thousands) Six Months Ended December 28, 2024 December 30, 2023 Operating activities: Net income (loss) $ ( 3,790 ) $ 1,419 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 5,536 5,498 Amortization of interest rate swap — 97 Amortization of deferred loan costs 1,286 137 Noncash lease expense 2,371 2,928 Provision for warranty 16 138 Provision for credit losses 372 49 Loss (gain) on disposal of assets 8 ( 36 ) Gain on insurance proceeds, net of losses — ( 431 ) Share-based compensation expense 83 111 Deferred income taxes ( 2,166 ) ( 1,213 ) Noncash accrued compensation benefit — ( 3,907 ) Changes in operating assets and liabilities: Trade receivables 19,415 15,708 Contract assets 2,361 2,155 Inventories 4,390 13,808 Other assets ( 3,922 ) 417 Accounts payable ( 15,809 ) ( 24,541 ) Accrued compensation and vacation ( 292 ) ( 3,768 ) Other liabilities 1,678 511 Cash provided by operating activities 11,537 9,080 Investing activities: Purchase of property and equipment ( 821 ) ( 2,609 ) Proceeds from insurance — 2,249 Cash used in investing activities ( 821 ) ( 360 ) Financing activities: Payment of financing costs ( 2,580 ) ( 625 ) Repayments of long term debt ( 2,294 ) ( 1,457 ) Borrowings under revolving credit agreement 310,646 272,755 Repayments of revolving credit agreement ( 343,489 ) ( 278,643 ) Principal payments on finance leases ( 1,507 ) ( 2,561 ) Proceeds from issuance of long-term debt 28,000 1,161 Cash used in financing activities ( 11,224 ) ( 9,370 ) Net decrease in cash and cash equivalents ( 508 ) ( 650 ) Cash and cash equivalents, beginning of period 4,752 3,603 Cash and cash equivalents, end of period $ 4,244 $ 2,953 Supplemental cash flow information: Interest payments $ 5,986 $ 6,015 Income tax payments, net of refunds $ 458 $ 1,602 Recognition of operating lease liabilities and right-of-use assets $ 784 $ 3,575 See accompanying notes to consolidated financial statements. 7 KEY TRONIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited, in thousands) Three Months Ended Six Months Ended December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023 Total shareholders’ equity, beginning balances $ 124,343 $ 131,069 $ 123,990 $ 130,617 Common stock (shares): Beginning balances 10,762 10,762 10,762 10,762 Ending balances 10,762 10,762 10,762 10,762 Common stock: Beginning balances $ 47,351 $ 47,786 $ 47,284 $ 47,727 Share-based compensation 16 53 83 112 Ending balances 47,367 47,839 47,367 47,839 Retained Earnings: Beginning balances $ 78,045 $ 83,321 $ 76,921 $ 82,986 Net income ( 4,914 ) 1,084 $ ( 3,790 ) 1,419 Ending balances 73,131 84,405 73,131 84,405 Accumulated other comprehensive income (loss): Beginning balances $ ( 1,053 ) $ ( 39 ) $ ( 215 ) $ ( 97 ) Unrealized gain (loss) on hedging instruments, net 42 230 ( 796 ) 288 Ending balances ( 1,011 ) 191 ( 1,011 ) 191 Total shareholders’ equity, ending balances $ 119,487 $ 132,435 $ 119,487 $ 132,435 See accompanying notes to consolidated financial statements. 8 KEY TRONIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements included herein have been prepared by Key Tronic Corporation and subsidiaries (the Company) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. The year-end condensed consolidated balance sheet information was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2024. The Company’s reporting period is a 52/53 week fiscal year ending on the Saturday closest to June 30. The three month and six month periods ended December 28, 2024 and December 30, 2023, were both 13 week periods. Fiscal year 2025 will end on June 28, 2025, which is a 52 week year. Fiscal year 2024 which ended on June 29, 2024, was also a 52 week year. Management’s Assessment of Liquidity Historically, due to the timing between the procurement of raw materials, production cycle and payment from our customers, we have financed operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under our credit facilities. We generated an operating loss and net loss of $( 1.1 ) million and $( 4.9 ) million, respectively, during the 3-month period ended December 28, 2024, and have positive working capital of $ 167.4 million as of December 28, 2024. Based on current projections, we anticipate generating cash from operations as revenue is expected to increase during the third quarter of fiscal year 2025 along with anticipated cost savings from ongoing restructurings. On December 3, 2024, we entered into an asset-based credit agreement with BMO Bank, N.A that provides for an asset-based senior secured revolving credit facility of up to $ 115 million, maturing on December 3, 2029. On December 3, 2024, we also entered into a $ 28 million term loan credit agreement with Callodine Commercial Finance, LLC. As of December 28, 2024, approximately $ 18.1 million was available under the credit facility. In addition, MXN 16 million ($ 0.8 million USD) was available under the line of credit with Banorte Financial Group. Additionally, $ 4.2 million of cash was on hand. We believe that projected cash from operations and funds available under our asset-based revolving credit facility will be sufficient to meet our working and fixed capital requirements for at least the next 12 months. 2. Significant Accounting Policies Reclassifications Certain prior period reclassifications were made to conform with the current period presentation. These reclassifications had no effect on reported income, comprehensive income, cash flows, total assets, or shareholders' equity as previously reported. Allowance for Credit Losses The Company evaluates the collectability of accounts receivable and records an allowance for credit losses, which reduces the receivables to an amount that management reasonably estimates will be collected. A specific allowance is recorded against receivables considered to be impaired based on the Company’s knowledge of the financial condition of the customer, and a general allowance is calculated and applied to remaining receivables based on the Company's historical collection experience and forecasted collection ability. In determining the amount of the allowance, the Company considers several factors including the aging of the receivables, the current business environment and historical experience. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Leases Lease assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using the Company’s incremental borrowing rate, unless the implicit rate is readily determinable. Our incremental borrowing rate represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in a similar economic environment. Lease assets also include any lease prepayments. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. Leases are classified as finance or operating, with 9 classification affecting the pattern and classification of expense recognition in the consolidated statements of income. For further information, please refer to Footnote “Leases” of the “Notes to Consolidated Financial Statements.” Revenue Recognition The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outline the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as costs related to the services are incurred, which approximates proportional performance of the service. This method is used because management considers it to be the best available measure of progress on the contracts. Revenue from scrap and excess inventory sales is recognized at the point-in-time of scrap at the customers direction, or, if applicable, shipment of the material to the customer. Earnings Per Common Share Basic earnings per common share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the combination of other potentially dilutive weighted average common shares and the weighted average number of common shares outstanding during the period using the treasury stock method. The computation assumes the proceeds from the exercise of equity awards were used to repurchase common shares at the average market price during the period. The computation of diluted EPS does not assume conversion, exercise, or contingent issuance of common stock equivalent shares that would have an anti-dilutive effect on EPS. Derivative Instruments and Hedging Activities The Company has entered into foreign currency forward contracts which are accounted for as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. The effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (AOCI) and is reclassified into earnings in the same period in which the underlying hedged transaction affects earnings. The derivative’s effectiveness represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. The Company uses derivatives to manage the variability of foreign currency fluctuations of expenses in our Mexico facilities. The foreign currency forward contracts have terms that are matched to the underlying transactions being hedged. As a result, these transactions fully offset the hedged risk and no ineffectiveness has been recorded. The Company’s foreign currency forward contracts potentially expose the Company to credit risk to the extent the counterparty may be unable to meet the terms of the agreement. The Company minimizes such risk by utilizing a counterparty with a strong credit rating. The Company’s counterparty to the foreign currency forward contracts is a major banking institution. This institution does not require collateral for the contracts, and the Company believes that the risk of the counterparty failing to meet their contractual obligations is remote. The Company does not enter into derivative instruments for trading or speculative purposes. 10 Income Taxes We compute our interim income tax provision through the use of an estimated tax rate (ETR) applied to year-to-date operating results and specific events that are discretely recognized as they occur. In determining the estimated annual ETR, we analyze various factors, including projections of our annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, our ability to use tax credits and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, tax rates, and certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments, are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision, rather than included in the estimated annual ETR. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences and benefits attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments based on new assessments and changes in estimates and which may not accurately forecast actual outcomes. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. The tax years 2005 through the present remain open to examination by the major U.S. taxing jurisdictions to which we are subject. Refer to Note 5 for further discussions. Recently Issued Accounting Standards On November 4, 2024 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures. The ASU requires entities to disclose in the notes to the financial statements specified information about certain costs and expenses. The ASU applies to the Company’s annual reporting period beginning in fiscal year 2028 and interim reporting periods beginning in fiscal year 2029. The Company does not anticipate early adoption of the new disclosure standard. On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU requires entities to disclose more detailed information relating to their reconciliation of statutory tax rate to effective tax rate, income taxes paid by jurisdiction, pretax income (or loss) from continuing operations, and income tax expense (or benefit). The ASU applies to the Company’s annual reporting period beginning in fiscal year 2026. The Company does not anticipate early adoption of the new disclosure standards. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires public entities to disclose information about their reportable segments' oversight and significant expenses on an interim and annual basis. The ASU is effective for the annual reporting period beginning in fiscal year 2025 and for interim periods beginning in fiscal year 2026. Early adoption is permitted. The Company is currently evaluating the guidance and its impact to the financial statements. 3. Inventories Inventories as of December 28, 2024 are $ 100.7 million compared to $ 105.1 million as of June 29, 2024. The components of inventories consist of the following (in thousands): December 28, 2024 June 29, 2024 (in thousands) Raw materials and supplies $ 79,735 $ 80,570 Work-in-process 20,974 24,529 Inventories $ 100,709 $ 105,099 11 4. Long-Term Debt Maturity Date Interest Rate December 28, 2024 June 29, 2024 (in thousands) Asset-based senior secured revolving credit facility (1) December 3, 2029 7.4 % $ 75,566 $ 107,149 Domestic term loan - Callodine (2) December 3, 2029 11.6 % 28,000 — Foreign line of credit (3) December 11, 2026 13.3 % 4,143 5,403 Domestic term loans - Balboa (4) September 19, 2030 6 % to 8 % 4,127 4,535 Foreign term loan - Banorte (5) April 24, 2026 5.5 % 1,600 2,200 Domestic term loan - Bank of America (6) August 14, 2025 4.9 % — 1,277 Total debt 113,436 120,564 Less: current portion of debt ( 5,063 ) ( 3,123 ) Less: unamortized financing costs ( 2,353 ) ( 1,059 ) Long-term debt, net $ 106,020 $ 116,382 (1) On December 3, 2024, Key Tronic Corporation (the "Company") entered into an asset-based credit agreement (the "Credit Agreement") among the Company, certain domestic subsidiaries (as co-borrowers or guarantors), BMO Bank, N.A (the "Bank"), as administrative agent and swing line lender, BMO Capital Markets as arranger and book runner, and certain financial institutions, as lenders. The Credit Agreement provides for an asset-based senior secured revolving credit facility (the "Credit Facility") of up to $ 115 million, maturing on December 3, 2029. Generally, under the Credit Agreement and at the Company’s option: (i) each SOFR Loan shall bear interest at a rate per annum equal to Adjusted Term SOFR (Term SOFR plus 0.10 %, subject to a floor of 0.00 %) plus an applicable margin of 2.50 % to 3.00 %, depending on the availability of borrowing amounts under the Credit Agreement; and (ii) each Base Rate Loan, Swing Line Loan or other Obligation shall bear interest at a rate per annum equal to the Base Rate (subject to a floor of 1.00 %) plus an applicable margin of 1.50 % to 2.00 %, depending on the availability of borrowing amounts under the Credit Agreement. As of December 28, 2024, the applicable margin was 2.75 % for SOFR Loans and 1.75 % for Base Rate Loans. If there is an event of default under the Credit Agreement, all loans and other obligations may bear interest at a rate of an additional 2.00 % on the otherwise applicable interest rates. In addition to the applicable interest rates, the Company is required to pay a fee of 0.2 % per annum on the unused portion of the Credit Facility, monthly in arrears. Availability on the line of credit is generally determined based on eligible inventory and accounts receivable balances. Proceeds from the Credit Facility and the Term Loan discussed below were used to pay-off the Company's prior loan and security agreement, as amended, with Bank of America, N.A. (with the related credit facility, the "Prior Credit Facility") in the amount of $ 99.7 million, as well as its outstanding equipment term loan, and financing costs related to the Credit Agreement. The Term Loan, may also be used to pay-off certain other existing debt, to issue letters of credit, and for other business purposes, including working capital needs. As of December 28, 2024, the Company had an outstanding balance under the asset-based revolving credit facility of $ 75.6 million, no outstanding letters of credit and $ 18.1 million available for future borrowings. On August 14, 2020, the Company entered into a loan agreement with Bank of America (“Loan Agreement”). The Loan Agreement, as amended, provided for an asset-based senior secured revolving credit facility with an availability of up to $ 120 million, subject to the Company’s borrowing base, and was set to mature on December 3, 2026. The interest rate as of December 2, 2024 at the time of pay-off was approximately 9.2 %. As of June 29, 2024, the Company had an outstanding balance under the Prior Credit Facility of $ 107.1 million, $ 0.3 million in outstanding letters of credit and $ 12.9 million available for future borrowings. (2) On December 3, 2024, the Company entered into a $ 28 million term loan (the "Term Loan") credit agreement among the Company, certain domestic subsidiaries (as co-borrowers or guarantors), Callodine Commercial Finance, LLC (“Callodine”), as administrative agent, and certain financial institutions, as term loan lenders. The Term Loan requires quarterly repayments of principal in the amount of $ 0.75 million. The remainder will be payable at maturity which is the earlier of December 3, 2029 or the maturity of the Credit Agreement described above. The Term Loan bears interest at Adjusted Term SOFR (Term SOFR plus 0.15 %, subject to a floor of 3.50 %) plus an applicable margin of 7.00 %. If there is an event of default under the Term Loan, all loans and other obligations may bear interest at a rate of an additional 2.00 % on the otherwise applicable interest rate. The Company had an outstanding balance of $ 28.0 million as of December 28, 2024. (3) On December 11, 2023, the Company entered into a loan agreement in Mexican peso with Banorte Financial Group. The agreement provides for a three-year secured line of credit up to MXN 100 million, subject to the Company’s borrowing base, maturing on December 11, 2026. The credit facility bears interest at Iterbancario de Equilibrio Interest Rate plus 2.75 %, and as 12 of December 28, 2024, was 13.3 %. As of December 28, 2024, the Company had an outstanding balance under the revolving credit facility of MXN 84 million ($ 4.14 million USD) and MXN 16 million ($ 0.8 million USD) available for future borrowings. (4) On September 19, 2023, the Company entered into a $ 1.1 million equipment financing agreement with Ameris Bank dba Balboa Capital ("Balboa Capital"). Combining with other equipment financing agreements entered in the third quarter of fiscal year 2023, a total of $ 5.5 million relates to the Company’s existing manufacturing equipment that bears an interest rate range of 6 % - 8 % and matures in the first quarter of fiscal 2030. Under these loan agreements, equal monthly payments of $ 94,000 commenced in the fourth quarter of fiscal year 2024 and will continue through the maturity of the equipment financing facility in the first quarter of fiscal 2030. The Company had an outstanding balance $ 4.1 million as of December 28, 2024. (5) On November 24, 2020, the Company entered into a $ 6.0 million equipment financing facility related to the Company’s existing manufacturing equipment that bears interest at 5.52 % and matures on April 24, 2026. Under this loan agreement, equal monthly payments of $ 100,000 commenced on May 24, 2021 and will continue through the maturity of the equipment financing facility on April 24, 2026. As of December 28, 2024, the Company had an outstanding balance of $ 1.6 million. As of June 29, 2024, the Company had an outstanding balance of $ 2.2 million. (6) On August 14, 2020, the Company entered into a $ 5.0 million equipment financing facility with Bank of America relating to the Company’s existing U.S. manufacturing equipment that accrued interest at 4.85 % and was set to mature on August 14, 2025. Under this loan agreement, equal monthly payments of approximately $ 94,000 commenced on September 14, 2020 and continued through the pay-off of the Prior Credit Facility on December 4, 2024. As of June 29, 2024, the Company had an outstanding balance of $ 1.3 million. Debt maturities as of December 28, 2024 for the next five years are as follows (in thousands): Fiscal Years Ending Amount 2025 (1) $ 2,524 2026 4,894 2027 8,104 2028 4,032 2029 - Thereafter 93,882 Total debt $ 113,436 Unamortized debt issuance costs ( 2,353 ) Long-term debt, net of debt issuance costs $ 111,083 (1) Represents scheduled payments for the remaining six-month period ending June 28, 2025. The Company must comply with certain financial covenants, including earnings before interest, taxes, depreciation, amortization and other adjustments, availability and, if triggered, a fixed charge coverage ratio. The credit agreement requires the Company to grant certain inspection rights to Bank of Montreal, limit or restrict the Company’s cash management; limit or restrict the ability of the Company to incur additional liens, make acquisitions or investments, incur additional indebtedness, engage in mergers, consolidations, liquidations, dissolutions, or dispositions, pay dividends or other restricted payments, prepay certain indebtedness, engage in transactions with affiliates, and use proceeds. As of December 28, 2024, the Company was in compliance with all financial covenants. 5. Income Taxes The Company expects to repatriate a portion of its foreign earnings based on increased net sales growth driving additional capital requirements domestically, cash requirements for potential acquisitions and to implement certain tax strategies. The Company currently expects to repatriate approximately $ 7.7 million of foreign earnings in the future. All other unremitted foreign earnings are expected to remain permanently reinvested for planned fixed assets purchases and improvements in foreign locations. 13 Repatriations of cash will generally be tax-free in the U.S. However, withholding taxes in China may still apply to any such future repatriations. Management has not changed its indefinite investment assertions with regard to the portion of accumulated earnings and profits in China that may be repatriated in the future. Accordingly, management estimates that future repatriations of cash from China may result in approximately $ 0.8 million of withholding tax. We do not anticipate there would be any offsetting foreign tax credits in the U.S. and as such, this potential liability is a direct cost associated with actual repatriations. Withholding taxes would not apply to future repatriations from Mexico or Vietnam. The Company has available approximately $ 10.8 million of gross federal research and development tax credits as of December 28, 2024. ASC 740 requires the Company to recognize in its financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. Accordingly, as of December 28, 2024, the Company has recorded $ 2.9 million of unrecognized tax benefits associated with these federal tax credits, resulting in a net deferred tax benefit of approximately $ 7.9 million. The Company evaluated tax law changes and regulatory guidance issued through the prior fiscal year. Such changes and regulations include guidance relating to foreign tax credits and consolidated NOL carryback claims. The Company evaluated the ongoing impact of these law and regulatory changes, and determined that they did not have a material impact on its provision for income taxes. On August 16, 2022, the Inflation Reduction Act of 2022 was signed into law. The Inflation Reduction Act of 2022 includes a new book minimum tax on certain large corporations and an excise tax on corporate stock buybacks, among other provisions. The Company has evaluated the impacts of this Act, and at this time the Company does not believe they will have a material impact on our consolidated financial position, results of operations, or cash flows. On January 27, 2021, the Company received official notice from the Vietnamese tax authorities, confirming tax benefits awarded (the “tax holiday”) related to the Company’s principal product line in Vietnam. The tax rate related to this product line will be zero percent for four years beginning with fiscal year 2021, then five percent for nine years, then ten percent for one year (as opposed to the normal twenty percent each year). 6. Earnings Per Share The following table presents a reconciliation of the denominator in the basic and diluted EPS calculation and the number of antidilutive common share awards that were not included in the diluted earnings per share calculation. These antidilutive securities occur when equity awards outstanding have an option price greater than the average market price for the period. Three Months Ended Six Months Ended (in thousands, except per share information) December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023 Net income (loss) $ ( 4,914 ) $ 1,084 $ ( 3,790 ) $ 1,419 Weighted average shares outstanding—basic 10,762 10,762 10,762 10,762 Effect of dilutive common stock awards — 127 — 127 Weighted average shares outstanding—diluted 10,762 10,889 10,762 10,889 Net income (loss) per share—basic $ ( 0.46 ) $ 0.10 $ ( 0.35 ) $ 0.13 Net income (loss) per share—diluted $ ( 0.46 ) $ 0.10 $ ( 0.35 ) $ 0.13 Antidilutive shares not included in diluted earnings per share 48 525 — 525 7. Stock-Based Compensation and Benefit Plans The Company’s 2024 Incentive Plan provides for equity and liability awards to employees and non-employee directors with service and performance vesting conditions in the form of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, stock awards, stock units, performance shares, performance units, and other stock-based or cash-based awards. At December 28, 2024, 1,595,362 shares were available for grant. Compensation cost is recognized on a straight-line basis over the requisite employee service period, which is generally the vesting period, and is recorded as employee compensation expense in cost of goods sold, research, development and engineering, and selling, general and administrative expenses. Share-based compensation is recognized only for those awards that are expected to vest. For SARs awards forfeitures are estimated at the date of grant based on historical experience and future expectations. Due to a lack of historical experience and a different grant pool than SARs, forfeitures for restricted stock units are accounted for prospectively as they occur. 14 Stock Appreciation Rights In addition to service conditions, SARs contain a performance condition. The additional performance condition is based upon the achievement of Return on Invested Capital (ROIC) goals relative to a peer group. All awards with performance conditions are evaluated quarterly to determine the likelihood that performance metrics will be achieved during the performance period. These awards are charged to compensation expense over the requisite service period based on the number of shares expected to vest. If the performance and service conditions are attained, then the SARs cliff vest after the completion of the three-year period from date of grant and expire five years from date of grant. SARs Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Balance, July 1, 2023 626,250 — $ 6.41 2.2 SARs forfeited ( 137,500 ) 6.94 SARs expired ( 101,250 ) 8.17 Balance, December 30, 2023 387,500 $ — $ 5.78 1.8 Balance, June 30, 2024 387,500 — $ 5.78 1.8 SARs forfeited ( 136,250 ) 7.17 SARs expired ( 115,000 ) 4.93 Balance, December 28, 2024 136,250 $ — $ 5.10 2.6 Exercisable at December 28, 2024 — — — — The Black-Scholes option valuation model is used by the Company for estimating the fair value of SARs. Option valuation models require the input of highly subjective assumptions, particularly for the expected term and expected stock price volatility. Changes in these assumptions can materially affect the fair value estimates. There were no SARs granted during the three or six months ended December 28, 2024 and December 30, 2023. Share-based compensation expense is recognized only for those awards that are expected to vest, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations. This forfeiture rate will be revised, if necessary, in subsequent periods if actual forfeitures differ from the amount estimated. Total SARs expense recognized during the three months ended December 28, 2024 and December 30, 2023 was approximately $( 158,000 ) and $ 52,000 , respectively. Total SARs expense recognized during the six months ended December 28, 2024 and December 30, 2023 was approximately $( 139,000 ) and $ 111,000 , respectively There were no SARs exercised during the three or six month periods ended December 28, 2024 or December 30, 2023. As of December 28, 2024, total unrecognized compensation expense for SARs awards was approximately $ 0.1 million, which is expected to be recognized over a weighted average period of approximately 0.6 years. Restricted Stock Units The Company grants restricted stock units that have a performance condition and/or a service condition. Restricted stock units with only a service condition generally vest in equal annual installments over a maximum of three years . Certain restricted stock units are granted with a performance condition. The final number of shares issued will be determined annually based on the achievement of annual financial targets. Forfeitures for restricted stock units are accounted for prospectively as they occur. The fair value of restricted stock units is the market close price on the date of grant. During the three months ended December 28, 2024, the Company granted 4,638 restricted stock units at a weighted average grant date fair value of $ 5.39 per share. Total restricted stock unit expense recognized during the three months ended December 28, 2024 was approximately $ 176,000 . During the six months ended December 28, 2024, the Company granted 329,457 restricted stock units at a weighted average grant date fair value of $ 4.52 per share. Total restricted stock unit expense recognized during the six months ended December 28, 2024 was approximately $ 223,000 . As of December 28, 2024, total unrecognized compensation expense on restricted stock units was $ 1.3 million, which is expected to be recognized over a weighted average period of approximately 2.4 years. 15 8. Commitments and Contingencies Litigation and Other Matters The Company is party to certain lawsuits or claims in the ordinary course of business. The Company does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on the financial position, results of operations or cash flow of the Company. Warranties The Company provides warranties on certain product sales. Allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires the Company to make estimates of product return rates and expected costs to repair or to replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from management’s estimates, adjustments to recognize additional cost of sales may be required in future periods. The Company’s warranty reserve was approximately $ 26,000 as of December 28, 2024 and $ 164,000 as of June 29, 2024. Gain from Insurance Recoveries, Net of Losses Gain from insurance recoveries, net of losses, relate to losses incurred from storm damage to the Company’s Arkansas facility on July 29, 2022, as the result of a lightning strike and were recorded throughout fiscal year 2024 and fiscal year 2023. The Company recorded no gain during the three or six months ended December 28, 2024. The Company recorded $ 0.4 million of gain during the six months ended December 30, 2023, and recorded no gain during the three months ended December 30, 2023. 9. Derivative Financial Instruments As of December 28, 2024, the Company had outstanding foreign currency forward contracts with a total notional amount of $ 29.0 million through the end of the second quarter of fiscal year 2025. During the three months ended December 28, 2024, the Company entered into $ 12.9 million of foreign currency forward contracts and settled $ 5.9 million of contracts. During the same period of the previous year, the Company entered into $ 6.5 million of foreign currency forward contracts and settled $ 3.2 million of contracts. During the six months ended December 28, 2024, the Company entered into $ 29.0 million of foreign currency forward contracts and settled $ 12.5 million of such contracts. During the same periods of the previous year, the Company entered into $ 6.5 million of foreign currency forward contracts and settled $ 3.2 million of contracts. Changes in the fair value of the forward contracts are recognized as a component of OCI and will be recognized in cost of sales when the hedged item affects earnings. The amount of net losses expected to be reclassified into earnings in the next 12 months is $ 1.3 million. On November 6, 2019, the Company entered into an interest rate swap contract with an effective date of November 6, 2019 and a termination date of November 1, 2023, related to the borrowings outstanding under the line of credit with Wells Fargo Bank. This interest rate swap contract was terminated on August 14, 2020 when the Company entered into the Loan Agreement with Bank of America. On the date of termination this interest rate swap was in a liability position of $ 776,500 , which has been amortized to interest expense over the original term of the swap. The following table summarizes the fair value of the derivative instruments in the Consolidated Balance Sheets as of December 28, 2024 and December 30, 2023 (in thousands): Fair Value Derivatives designated as hedging instruments under Subtopic 815-20 Balance Sheet Location December 28, 2024 June 29, 2024 Foreign currency forward contracts Other current liabilities $ 1,306 $ 277 16 The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the three months ended December 28, 2024 and December 30, 2023, respectively (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of September 28, 2024 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of December 28, 2024 Forward contracts Cost of sales $ 1,053 $ ( 543 ) $ 501 $ 1,011 Total $ 1,053 $ ( 543 ) $ 501 $ 1,011 Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of September 30, 2023 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of December 30, 2023 Forward contracts Cost of sales $ — $ 263 $ ( 72 ) $ 191 Interest rate swap Interest expense ( 39 ) — 39 — Total $ ( 39 ) $ 263 $ ( 33 ) $ 191 The following tables summarize the gain (loss) on derivative instruments, net of tax, on the Consolidated Statements of Operations for the six months ended December 28, 2024 and December 30, 2023, respectively (in thousands): Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of June 29, 2024 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of December 28, 2024 Forward contracts Cost of sales $ 215 $ ( 2 ) $ 798 $ 1,011 Total $ 215 $ ( 2 ) $ 798 $ 1,011 Derivatives Designated as Hedging Instruments Classification of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) AOCI Balance as of July 1, 2023 Effective Portion Recorded In AOCI Effective Portion Reclassified From AOCI Into Income AOCI Balance as of December 30, 2023 Forward contracts Cost of sales $ — $ 263 $ ( 72 ) $ 191 Interest rate swap Interest expense ( 97 ) — 97 — Total $ ( 97 ) $ 263 $ 25 $ 191 As of December 28, 2024, the Company does not have any foreign exchange contracts with credit-risk-related contingent features. The Company is subject to the risk of fluctuating interest rates from our line of credit and foreign currency risk resulting from our China and Vietnam operations. The Company does not currently manage these risk exposures by using derivative instruments. 17 10. Revenue Revenue Recognition The Company specializes in services ranging from product manufacturing to engineering and tooling services. The first step in its process for revenue recognition is to identify the contract with a customer. A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied. The Company generally enters into manufacturing service agreements (“MSA”) with its customers that outline the terms of the business relationship between the customer and the Company. This includes matters such as warranty, indemnification, transfer of title and risk of loss, liability for excess and obsolete inventory, pricing, payment terms, etc. The Company will also bid on a program-by-program basis for customers in which an executed MSA may not be in place. In these instances, as well as when we have an MSA in place, we receive customer purchase orders for specific quantities and timing of products. As a result, the Company considers its contract with a customer to be the combination of the MSA and the purchase order. The transaction price is fixed and set forth in each purchase order. In the Company's normal course of business, there are no variable pricing components, or material amounts refunded to customers in the form of refunds or rebates. The Company assesses whether control of the product or services promised under the contract is transferred to the customer at a point in time (shipment) or over time (as we manufacture the product). The Company is first required to evaluate whether its contracts meet the criteria for 'over-time' or 'point-in-time' recognition. The Company has determined that for the majority of its contracts the Company is manufacturing products for which there is no alternative use due to the unique nature of the customer-specific product, IP and other contract restrictions. The Company has an enforceable right to payment including a reasonable profit for performance completed to date with respect to these contracts. As a result, revenue is recognized under these contracts 'over-time' based on the input cost-to-cost method as it better depicts the transfer of control. This input method is based on the ratio of costs incurred to date as compared to the total estimated costs at completion of the performance obligation. For all other contracts that do not meet these criteria, such as manufacturing contracts for which the terms do not provide an enforceable right to payment for performance completed to date, the Company recognizes revenue when it has transferred control of the related manufactured products which generally occurs upon shipment to the customer. Revenue from engineering services is recognized over time as costs related to the services are incurred, which approximates proportional performance of the services. This method is used because management considers it to be the best available measure of progress on the contracts. Revenue from scrap and excess inventory sales is recognized at the point-in-time of scrap at the customers direction, or, if applicable, shipment of the material to the customer. The Company’s sales arrangements do not contain any significant financing component for its customers. The Company generally provides a warranty for workmanship on its manufacturing contracts. Although we offer warranties on our products, our warranties are considered to be assurance-type in nature and do not cover anything beyond ensuring that the product is functioning as intended. Based on the guidance in ASC 606, assurance-type warranties do not represent separate performance obligations; therefore, the primary performance obligation in the majority of our contracts is the delivery of a specific good through the purchase order submitted by our customer. The Company elected not to disclose information about remaining performance obligations as they are part of contracts that have expected durations of one year or less. The Company has elected to expense costs to obtain contracts as incurred as these costs are immaterial to the financial statements. During the first six months of fiscal year 2025, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods. 18 Contract Balances A contract asset is recognized when the Company has recognized revenue, but has not issued an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheet and transferred to receivables when the right to payment becomes unconditional. The following table summarizes the activity in the Company’s contract assets during the six months ended December 28, 2024 (in thousands): Contract Assets Beginning balance, June 29, 2024 $ 21,250 Revenue recognized 233,082 Amounts collected or invoiced ( 235,440 ) Ending balance, December 28, 2024 $ 18,892 Disaggregation of Revenue The following table presents the Company’s revenue disaggregated for the three and six months ended December 28, 2024 and December 30, 2023 (in thousands): Revenue Recognition Three Months Ended Six Months Ended December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023 Over-Time $ 110,500 $ 126,635 $ 233,082 $ 258,964 Point-in-Time 3,353 21,212 12,329 38,995 Total $ 113,853 $ 147,847 $ 245,411 $ 297,959 11. Leases The Company has several commitments under operating and financing leases for warehouses, manufacturing facilities, office buildings, and equipment with initial terms that expire at various dates during the next 1 year to 7 years. The Company has some leases that include an extension clause. Management has considered the likelihood of exercising each extension option included and estimated the duration of the extension option, for those leases management determined to be reasonably certain, in calculating the lease term for measurement of the right of use asset and liability. For operating leases, management assumed a discount rate of 4.12 %. The weighted average discount rate is disclosed in the tables below. The components of lease cost for the three months and six months ended December 28, 2024 and December 30, 2023 were (in thousands): 19 Three Months Ended Six Months Ended December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023 Lease cost Classification Operating lease cost Cost of sales $ 1,261 $ 1,223 $ 2,600 $ 2,350 Operating lease cost Selling, general and administrative expenses $ 182 $ 183 $ 366 $ 367 Financing lease cost Cost of sales $ 866 $ 1,186 $ 2,172 $ 2,465 Financing lease cost Selling, general and administrative expenses $ 45 $ 49 $ 98 $ 104 Total lease cost $ 2,354 $ 2,641 $ 5,236 $ 5,286 Fixed lease cost $ 1,283 $ 1,336 $ 3,857 $ 2,434 Short-term lease cost 1,071 1,305 $ 1,379 $ 2,852 Total lease cost $ 2,354 $ 2,641 $ 5,236 $ 5,286 Amounts reported in the Consolidated Balance Sheet as of December 28, 2024 and June 29, 2024 were (in thousands, except weighted average lease term and discount rate): December 28, 2024 June 29, 2024 Operating Leases: Operating lease right of use assets $ 13,829 $ 15,416 Operating lease liabilities (1) $ 13,829 $ 15,416 Weighted-average remaining lease term (in years) Operating leases 3.56 3.97 Weighted-average discount rate Operating leases 4.12 % 4.00 % Financing Leases (2) : Financing lease right of use assets $ 2,062 $ 3,569 Financing lease liabilities $ 1,304 $ 2,128 Weighted-average remaining lease term (in years) Financing leases 0.91 1.06 Weighted-average discount rate Financing leases 11.80 % 11.18 % (1) The current portion of the total operating lease liabilities of $ 5.4 million is classified under Other Current Liabilities resulting in $ 8.4 million classified under Operating Lease Liabilities in the Long-term Liabilities section of the condensed consolidated balance sheet. (2) The total finance lease right of use assets of $ 2.1 million is classified under Other Long-term Assets. The current portion of the total finance lease liabilities of $ 1.2 million is classified under Current portion of debt, net , resulting in $ 0.1 million classified in Other Long-term Liabilities section of the condensed consolidated balance sheet. 20 Future lease payments under non-cancellable leases as of December 28, 2024 are as follows (in thousands): Fiscal Years Ending Operating Leases Finance Leases 2025 (1) $ 2,728 $ 814 2026 4,488 563 2027 3,404 — 2028 2,324 — 2029 1,051 — Thereafter 822 — Total undiscounted lease payments $ 14,817 $ 1,377 Less: present value discount ( 988 ) ( 73 ) Total lease liabilities $ 13,829 $ 1,304 (1) Represents estimated lease payments for the remaining six-month period ending June 28, 2025. As of December 28, 2024, we have additional operating leases for commercial properties that have not yet commenced with future lease payments of approximately $ 22 million.